Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
On November 1, 2019, the Ministry of Justice of the People's Republic of China (PRC) released the draft Regulations on the Implementation of the Foreign Investment Law (Draft Implementation Regulations) for public consultation. This is a long-awaited step following promulgation of the Foreign Investment Law (FIL) on March 15, 2019. The formal version of the implementation regulations is intended to take effect, together with the FIL, on January 1, 2020. For further information on the FIL, please refer to our recent publication.
The key aims of the FIL are to:
The promulgation of the FIL has demonstrated the Chinese Government’s firm and continuous commitment to open up its market to foreign investment. However, the FIL is rather generic and high level in terms of its provisions. The Draft Implementation Regulations also lack the level of details as expected by the market but have clarified a few ambiguous points arising from the FIL.
We set out below the key highlights under the Draft Implementation Regulations:
The FIL states that China will establish a foreign investment services system to provide services to FIEs with regard to laws, regulation, policies and potential investment projects. The Draft Implementation Regulations clarify that the National Integrated Online Government Service Platform (the Platform) will be used to provide such services3. The infrastructure of the Platform (http://gjzwfw.www.gov.cn/) was completed at the end of 2018 and a trial website was launched in September 2019. The Platform now incorporates over 1000 service items offered by 44 government agencies at the central level and over 3 million service items provided by 32 provincial governments, available to not only legal entities operating in the China market but also individuals.
The FIL provides that China will protect the intellectual property rights of foreign investors and FIEs and “strictly hold the infringers legally liable according to the law”. The Draft Implementation Regulations further provide, although still rather briefly, that China will establish a punitive damages system against intellectual property infringements in order to strengthen intellectual property protection.
However, the Draft Implementation Regulations stay silent on the legal consequences if the local governments fail to comply with these requirements.
The FIL implements a five-year transition period (starting from January, 1 2020) for existing FIEs to convert their corporate governance structure/arrangements to be in line with the PRC Company Law. Upon the FIL taking effect on January 1, 2020, the current laws and regulations specially applicable to Sino-foreign joint ventures and wholly foreign-owned enterprises will cease to be effective, and accordingly the PRC Company Law will apply to the corporate governance structure/arrangements of FIEs. The Draft Implementation Regulations further require existing FIEs to complete the conversion within six months following January 1, 2025, otherwise the local authorities will not process applications made by FIEs for any other company registration matters (e.g. change of board directors).
These recent legislative developments signal the Chinese Government’s continuous commitment to enhancing the legal framework for foreign investment in China. While the road ahead for foreign investors looking to invest in China is exciting, to what extent the high-level principles set out in the FIL will be implemented depends on the final shape of the Draft Implementation Regulations and related legislative and enforcement practices.
We are closely monitoring the changes to China’s foreign investment laws and will continue to provide further updates.
Foreign investments may enjoy national treatment unless they fall within the scope of the “Negative Lists”, which sets out the industries in which foreign investment is prohibited, restricted or subject to special administrative measures. The latest version of the national Negative List was issued by the National Development and Regulatory Commission and the Ministry of Commerce and came into effect on July 30, 2019. Foreign investments into the pilot free trade zones in China are subject to a separate Negative List.
“Round-tripping investment” refers to direct or indirect investment activities carried out in China by Chinese residents through offshore SPVs. The investment activities include establishment of FIEs by the SPVs owned by Chinese residents by way of greenfield investments or mergers and acquisitions.
The Platform now enables access via an official website, a Wechat official account, a mobile application and three mini-programs respectively on Wechat, Alipay, and Baidu.
Article 2 of the FIL defines foreign investment to mean investment activities undertaken “directly or indirectly” in China by foreign individuals, foreign enterprises or other foreign organisations, without clarifying what exactly constitutes “indirect investment”.
On May 4, the decree amending the Mexican Hydrocarbons Law was published in the Federal Official Gazette.
© Norton Rose Fulbright LLP 2021